The foreign exchange market is stable (able to correct a trade deficit by a depreciation of the nation's currency)if ____________________
A)the sum of the absolute values of price elasticities of the US demand for imports and the foreign demand for US exports is greater than one.
B)the sum of the absolute values of price elasticities of the US demand for imports and the foreign demand for US exports is less than one.
C)the sum of the absolute values of price elasticities of the US supply of exports and the foreign supply of imports is greater than one.
D)the sum of the absolute values of price elasticities of the US supply for imports and the foreign demand for US exports is less than one.

Question

Quizplus · Accepted Answer

A trade deficit can be corrected through a depreciation of the nation's currency, which makes imports more expensive and exports cheaper. The effectiveness of this strategy depends on the price elasticities of demand for imports and exports. If the sum of the absolute values of these elasticities is greater than one (as in option A), then a depreciation of the currency will lead to a significant decrease in imports and an increase in exports, resulting in a correction of the trade deficit.

The Foreign Exchange Market Is Stable (Able to Correct a Trade